In India's telecom market, Vodafone (LON:VOD) and Idea have been two of the most powerful players. In terms of subscriber count, Vodafone and Idea were the two largest telecom carriers in 2016. Following the merger in 2018, Vodafone Idea Ltd (NS:VODA) (VI) was the market leader, with over 38% of the customer base.
Failure of Vodafone Idea
Things changed dramatically once Jio entered the market. With a 35% market share, Reliance Industries Ltd (NS:RELI) Jio tops the market, followed by Bharti Airtel Ltd. (NS:BRTI) with 29% and Vodafone-Idea with just 25% which is reducing drastically.
Within three years of the Jio’s launch, it had snatched over 33% of the market. There were huge Pricing wars during this time, with each supplier attempting to offer rival plans at the lowest possible cost. This is where Vodafone Idea fell short of Jio's massive financial reserves and Airtel's industry-leading connectivity speeds.
The average revenue per user (ARPU) was Rs. 100 for Vodafone Idea, while Jio enjoyed Rs. 124 and Airtel enjoyed Rs. 129.
Vodafone Idea was trading in the range of Rs. 50-70 when the merger took place in 2018. However, in the following year, the price fell below Rs. 10 per share, and at one time, VI was selling at Rs. 3.4 a share. A portion of this decline might be due to the company's balance sheets being plagued by an unhealthy cash flow for the past few years. VI is still trading at Rs. 5.50 per share.
VI owes the banks and the DoT, a large sum of money. It has been battling what appears to be a long-lost struggle with the supreme court regarding adjusted gross revenue (AGR) and regulatory-related dues. VI owes more than Rs. 50,000 crores, which resulted in a significant drop in its credit rating. In the recent past, the company requested a two-year moratorium on its debts, while the government planned to use third-party auditors to reconcile the payments that the company needs to make. Given the depth of dues, the failure of VI could have a major impact on the Indian financial system.
Kumar Mangalam Birla
Non-executive director and Non-executive chairman of VI, Kumar Mangalam Birla decided to step down from the Vodafone Idea management and he has already written a letter to the Government offering to hand over the stake he owns in the company if it would help save the company.
Vodafone Idea has been attempting to raise Rs 25,000 Cr from different investors to fund its operations and fulfill government dues and obligations. However, it has so far proven unsuccessful. Investors are hesitant to participate in the company unless there is clarification on AGR liability and a sufficient payment moratorium.
The Supreme Court also dismissed the company's contention that the AGR dues to the Department of Telecommunications were incorrect (DoT).
Vodafone Idea owes the government Rs 58,254 Cr but has only paid Rs 7,854 Cr. The company claims it has dues of only Rs 21,533 Cr.
If VI plans to wind up the company how will it affect the Indian Banks?
Lenders to VI are set to meet to discuss their options for dealing with the debt-ridden telecommunications company, which is fighting to stay solvent.
Lenders, both domestic and international, have an exposure of Rs. 1.8 lakh Cr. Guarantees account for a significant portion of this. Some private lenders that have funded exposure have already begun to set aside funds. The majority of the exposure, however, is with public sector banks.
If Vodafone fails to pay the debts to the government, these guarantees are triggered and it will be immediately turned into debt and become a non-performing asset (NPA).
The lenders have been charging a significantly higher cash margin from Vodafone for their guarantees in recent years so the blow on Public Sector banks might be less severe. The guarantees at IDBI bank have up to 40% margins, but they can still cause due damage to the Indian Financial System and are significant enough to wipe away huge profits.
For banks, debt recovery is based on VL's continued functioning and client retention. While VI still controls over a quarter of the Indian market, that may all change in an instant if there is a default. According to banks, the insolvency procedure can only work if there are purchasers.
The Centre cannot make an exemption for one company. Thus the government dues cannot be avoided. Even in insolvency situations, the Department of Telecommunications has asserted that its obligations are those of a financial creditor, despite attempts to classify them as operational creditors.
Insolvency would be difficult due to the uncertainties surrounding DoT allegations, which lenders are already dealing in the Reliance Communication insolvency case. Lenders don't want to risk insolvency since it could lead to customer exit, as happened with Reliance Communication.
Effect of New Taxation law Bill on Vodafone
The union government has made a big move by amending the Income Tax Act to void the law's retrospective tax demands, which led to disputes with Cairn Energy and Vodafone Idea.
The Taxation Laws Bill, 2021, was submitted in the Lok Sabha by Finance Minister Nirmala Sitharaman, to remove tax claims made on indirect transfers of Indian assets before May 28, 2012.
Last year, Cairn and Vodafone sued India in foreign courts over the retrospective tax, but India lost both cases.
Following Vodafone's $11 billion acquisition of Indian mobile assets from Hutchison in 2007, the government demanded Rs 11,000 crore in taxes.
The government suggests that the litigants will receive a full refund of the principal payment, but the companies must withdraw their claims and provide assurances that they will not seek cost damages or interest.
This could act as an advantage for VI but it will not put an end to the other never-ending problems of VI.
What Should Investors Do?
VI's stock slumped over 17% on August 5th as the cash-strapped telecom provider sought government assistance to keep operations going. With no future guidance and the resignation of Kumar Mangalam Birla, the upcoming quarters can be traumatic for VI investors. The cash flows are bad and the dues to the government are huge which can cause a huge effect on the balance sheet. IDFC (NS:IDFC) First Bank, having the highest exposure as a percentage of total loans, has fallen drastically this week.
Ending Note
Vodafone and Idea teamed up to fight Jio's entry and innovative business tactics, but they were unable to launch competing technology and plan in time to escape disaster. VI found it difficult to compete in a market with high operating costs and low profit margins. VI's stock has dropped by more than 94%.
The new Tax bill could act as an advantage for VI but it will not reduce the stress and long dues to the government and other debts with the banks.
Can there be a comeback for VI in India?
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Disclaimer: The above analysis is only for educational purposes. Kindly do not treat this as a recommendation to buy/sell the stock.